4 ms·

Bubbles may be inevitable, but that doesn't mean we can't do anything to mitigate them. To me, it seems clear that the "Trader's option" -- big bonuses in good

by jderick 18y ago

Bubbles may be inevitable, but that doesn't mean we can't do anything to mitigate them. To me, it seems clear that the "Trader's option" -- big bonuses in good years, no downside in bad -- is a recipe for disaster in any market. I doubt this bubble would have been nearly as bad if the banks were still owned primarily by their management.

Tichy 18y ago
What I don't get is why should we expect the government to do a better job at managing banks than the banks themselves? If "trader's options" are bad, why can't the banks figure it out for themselves?
- mattobrien 18y ago
  Because trader's options are good for bankers, but not good for the public. These options create incentives for bankers to take large risks to maximize short term profits, and hence year end bonuses. But if risky trades blow up, a banker merely loses his job - not exactly nontrivial, but certainly mitigated by getting to keep bonuses from past years. And if enough risky trades blow up within a firm, sending it into insolvency, it can always get government bailouts because of the systemic risk its failure would produce. Essentially, gains are privatized and losses are socialized. This is why the government needs to restructure bank pay incentives, with a key probably being making banks privately held again, as well as reducing leverage and regulating the system better (or at all). Granted, some firms, like Morgan Stanley and UBS, are beginning to experiment with clawback provisions, that have longer 3 year horizons for bonuses. But until we reform the system, this won't be in banks', or bankers', interests, except from a PR angle, which clearly matters. And government pressure can help us get there faster.
  - Tichy 18y ago
    Good for bankers, yes, but not good for banks, or are they? And banks employ bankers. Remembering Joel's writings on performance measurements, I am simply skeptic that there can be any remedy, short of people watching out for themselves. I suspect even with longer windows for bonuses, there will be ways to game the system.
    - mattobrien 18y ago
      Good for bankers and bad for banks. Bankers who took more conservative, longer term views during the bubble would have been more likely to lose their jobs, because their short term profits would not have been as large as their peers' who engaged in groupthink/stupidity. So this pay structure effectively weeded out bankers who actually looked out for the long term health of their banks. Simply making banks privately held companies, so the bankers have their own capital on the line in their trades, eliminates this moral hazard. Banks do not have some natural right to be publicly traded companies.
netcan 18y ago
An inevitability of stock markets?

by jderick 18y ago

Tichy 18y ago

What I don't get is why should we expect the government to do a better job at managing banks than the banks themselves? If "trader's options" are bad, why can't the banks figure it out for themselves?

mattobrien 18y ago
Because trader's options are good for bankers, but not good for the public. These options create incentives for bankers to take large risks to maximize short term profits, and hence year end bonuses. But if risky trades blow up, a banker merely loses his job - not exactly nontrivial, but certainly mitigated by getting to keep bonuses from past years. And if enough risky trades blow up within a firm, sending it into insolvency, it can always get government bailouts because of the systemic risk its failure would produce. Essentially, gains are privatized and losses are socialized. This is why the government needs to restructure bank pay incentives, with a key probably being making banks privately held again, as well as reducing leverage and regulating the system better (or at all). Granted, some firms, like Morgan Stanley and UBS, are beginning to experiment with clawback provisions, that have longer 3 year horizons for bonuses. But until we reform the system, this won't be in banks', or bankers', interests, except from a PR angle, which clearly matters. And government pressure can help us get there faster.
- Tichy 18y ago
  Good for bankers, yes, but not good for banks, or are they? And banks employ bankers. Remembering Joel's writings on performance measurements, I am simply skeptic that there can be any remedy, short of people watching out for themselves. I suspect even with longer windows for bonuses, there will be ways to game the system.
  - mattobrien 18y ago
    Good for bankers and bad for banks. Bankers who took more conservative, longer term views during the bubble would have been more likely to lose their jobs, because their short term profits would not have been as large as their peers' who engaged in groupthink/stupidity. So this pay structure effectively weeded out bankers who actually looked out for the long term health of their banks. Simply making banks privately held companies, so the bankers have their own capital on the line in their trades, eliminates this moral hazard. Banks do not have some natural right to be publicly traded companies.

netcan 18y ago

An inevitability of stock markets?